Economic Growth and Development Peter Boettke Econ 881Spring

Economic Growth and Development Peter Boettke Econ 881/Spring 2005 11 April

A Tell All Tale n Sen and the differences in development economics in 1964 and 2004 q 1964 – exploitation theme n q Western Wealth is a consequence of exploitation of the Third World 2004 -- gains from trade theme n Wealth is a consequence realizing mutually beneficial exchange

A Short History of Modern Development Economics n 19 th Century Development Theory q Theory n Why No Capitalism in China? q q Policy n n 20 th q Trade and/or Colonialism Century Development Theory n Socialist Industrial Planning q q First, Second, Third World Policy n Economics of Backwardness q n Underdeveloped World and the Developed World Keynesianism 21 st Century Development q Theory n q New Growth Theory and Institutionalism Policy n n Washington Consensus Shock Therapy versus Gradualism

Growth Theory n Birth of the Solow model q Soviet debate on Industrialization n Harrod, Domar, and Solow q n Solow conclusion q Bohm-Bawerkian presumption n n Y = f(K + L) + e Capital intensity doesn’t explain different performance of economies Explanation is to be found in the error term Solow problem q Leaving unexplained what must be explained q Lack of convergence Lucas revolution q The reason why Capital Doesn’t Go from Rich to Poor Countries is because of human capital differences

Lucas, Lectures on Economic Growth, p. 95. The main engine of growth is the accumulation of human capital – of knowledge – and the main source of differences in living standards among nations is differences in human capital. Physical capital accumulation plays an essential but decidedly subsidiary role. Human capital accumulation takes place in schools, in research organizations, and in the course of producing goods and engaging in trade. Little is known about the relative importance of these different models of accumulation, but for understanding periods of very rapid growth in a single economy, learning on the job seems to be by far the most central. For such learning to occur on a sustained basis, it is necessary that workers and managers continue to take on tasks that are new to them, that they continue to move up … the quality ladder. For this to be done on a large scale, the economy must be a large-scale exporter.

But is this confusing cause and consequence? n Human Capital q Why is it attractive to invest in your human capital? n n q Quality Ladder n q Mobility Rate of return (schooling and growth) Organization and opportunity Exporter n Trading opportunities

Basic Economic Reasoning of Development n n Increases in Real Income Can Only Come From Increases in Real Productivity results from: q Improvements in labor skill n q Increases in capital n q Human capital Technological improvements Refinements in managerial and organizational form n New techniques of organizing and motivating teams

“Tell me as if I was in kindergarten. ” n People q n Resources q n Treat as given Rules q How people interact with each other, and how they utilize resources n n Policy framework Policy within the framework

What Role for Entrepreneurship in Economic Development? n Productive q Arbitrage n q Innovation n n Closing price gaps New products and/or new methods of production Unproductive q Wealth transfers n q Rent-seeking Predation n Theft

Austrian Conundrums of Their Own Making n Universal nature of alertness q n Extreme subjectivism q n Is entrepreneurship something that can be cultivated? Is there a supply curve for entrepreneurship? Wealth creation is not about material progress, but utility gains. Thus, what does it mean to discuss wealth creation as a goal of public policy? Anti-equilibrium q Since the preoccupation with equilibrium ignores change as a consequence of formalism does that mean that all attempts to explain mechanism and processes that tend toward an equilibrium must be rejected as too mechanistic and not grounded in human action? n Issue of context dependence

The Multifaceted Explanation for Development n Economic/Financial q Economic Calculation n Political/Legal q Constraining Predation n Risk Assessment Financial intermediation Rule of law Constitutionalism Social/Cultural q Liberalism n n Individualism Egalitarianism in process not results